NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Nature of Business
Unless the context requires otherwise, references to “ARIAD,” “Company,” “we,” “our,” and “us,” in this quarterly report refer to ARIAD Pharmaceuticals, Inc. and its subsidiaries. ARIAD is a global oncology company focused on transforming the lives of cancer patients with breakthrough medicines. The Company’s mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest unmet medical need – aggressive cancers where current therapies are inadequate.
The Company is selling its cancer medicine, Iclusig® (ponatinib) for the treatment of adult patients with chronic myeloid leukemia (“CML”) and Philadelphia chromosome positive acute lymphoblastic leukemia (“Ph+ ALL”). In addition to commercializing Iclusig in the United States, Europe and other territories, the Company is developing Iclusig for approval in additional countries and for additional cancer indications and in earlier lines of therapy. The Company is also developing two product candidates, brigatinib (AP26113) and AP32788. Brigatinib is being studied in patients with advanced solid tumors, including non-small cell lung cancer. AP32788 is being developed for the treatment of non-small cell lung cancer and other solid tumors. Ridaforolimus, a compound that the Company discovered internally and subsequently out-licensed to Medinol, Ltd. (“Medinol”), is being developed by Medinol for use on drug-eluting stents. In addition to its clinical development programs, the Company has a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer.
2. Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited. The Company has prepared the condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended
December 31, 2015
. The condensed consolidated balance sheet as of
December 31, 2015
was derived from the audited consolidated balance sheet included in the Annual Report on Form 10-K for the year ended
December 31, 2015
.
The Company has prepared the accompanying condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year
2016
.
The Company's significant accounting policies were described in Note 1 to its consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no significant changes to the Company's accounting policies since December 31, 2015.
Foreign Currency
The net total of realized and unrealized transaction losses and gains was a loss of
$0.8 million
and a gain of
$1.1 million
for the
three
-month periods ended
March 31, 2016
and
2015
, respectively.
Marketable Securities
Marketable securities consist of
687,139
shares of common stock of REGENXBIO, Inc. (“REGENXBIO”), which became a publicly traded company in September 2015. At March 31, 2016, these shares had a value of
$7.4 million
. The Company obtained these shares in connection with a license agreement it entered into with
REGENXBIO in November 2010 for certain gene expression regulation technology. The Company was restricted from trading these securities until
March 14, 2016
pursuant to an agreement it entered into with REGENXBIO. The Company has classified these shares as “available for sale” investments and recognized an unrealized loss of
$4.0 million
, using a Level 1 valuation input, which has been excluded from the determination of net loss and is recorded in accumulated other comprehensive (loss) income, a separate component of stockholders’ equity, in the
three
-month period ended
March 31, 2016
. These shares had been accounted for using the equity method with a carrying value of zero due to losses incurred by REGENXBIO in previous years.
Accrued Rent
The Company recognizes rent expense for leases with increasing annual rents on a straight-line basis over the term of the lease. The amount of rent expense in excess of cash payments is classified as accrued rent. Any lease incentives received are deferred and amortized over the term of the lease. At
March 31, 2016
and
2015
, the amount of accrued rent was
$5.0 million
for each period. Of these amounts, at
March 31, 2016
and
2015
,
$4.5 million
for each period were included in other long-term liabilities, with the remaining
$0.5 million
as of both
March 31, 2016
and
2015
, respectively, included in other current liabilities.
Product Revenue, Net
The following table summarizes the activity in each of the product revenue allowances and reserve categories for the
three
-month period ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Trade
Allowances
|
|
Rebates,
Chargebacks
and
Discounts
|
|
Other
Incentives/
Returns
|
|
Total
|
Balance, January 1, 2016
|
$
|
111
|
|
|
$
|
4,460
|
|
|
$
|
551
|
|
|
$
|
5,122
|
|
Provision
|
375
|
|
|
6,036
|
|
|
363
|
|
|
6,774
|
|
Payments or credits
|
(331
|
)
|
|
(4,936
|
)
|
|
(250
|
)
|
|
(5,517
|
)
|
Balance, March 31, 2016
|
$
|
155
|
|
|
$
|
5,560
|
|
|
$
|
664
|
|
|
$
|
6,379
|
|
In 2012, prior to the Company obtaining marketing authorization for Iclusig in Europe, the French regulatory authority granted an
Autorisation Temporaire d’Utilisation
(ATU), or Temporary Authorization for Use, for Iclusig for the treatment of patients with CML and Ph+ ALL under a nominative program on a patient-by-patient basis. Upon completion of this program, the Company became eligible to ship Iclusig directly to customers in France as of October 1, 2013. Shipments under these programs are subject to pricing and reimbursement negotiations that are in process as of
March 31, 2016
. As a result, these shipments have not met the criteria for revenue recognition as the price for these shipments is not yet fixed.
The price of Iclusig in France is expected to become fixed upon completion of pricing and reimbursement negotiations. At that time, the Company will record revenue for the cumulative shipments in France, net of amounts that will be refunded to the health authority based on the results of the pricing and reimbursement negotiations. The aggregate gross selling price of the shipments under these programs amounted to
$28.4 million
through
March 31, 2016
, of which
$26.7 million
was received as of
March 31, 2016
. Amounts received from shipments in France are recorded in other current liabilities in the consolidated balance sheet.
The Company has entered into distributor arrangements for Iclusig in a number of countries including Australia, Canada, Israel, certain countries in central and Eastern Europe, and Turkey and Japan. The Company recognizes net product revenue from sales of Iclusig under these arrangements when all criteria for revenue recognition have been satisfied.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable from customers and cash held at financial institutions. The Company believes that such customers and financial institutions are of high credit quality. As of
March 31, 2016
, a portion of the Company’s cash and cash equivalent accounts were concentrated at a single financial institution, which potentially exposes the Company to credit risks. The Company does not believe that there is significant risk of non-performance by the financial institution and the Company’s cash on deposit at this financial institution is fully liquid.
For the
three
-month period ended
March 31, 2016
one
individual customer accounted for
74 percent
of net product revenue. For the
three
-month period ended
March 31,
2015
one
individual customer accounted for
77 percent
of net product revenue. As of
March 31, 2016
,
one
individual customer accounted for
67 percent
of accounts receivable. As of
March 31, 2015
,
one
individual customer accounted for
73 percent
of accounts receivable. No other customer accounted for more than
10
percent of net product revenue for
March 31,
2016
or
2015
or accounts receivable as of either
March 31,
2016
or
December 31, 2015
.
Segment Reporting and Geographic Information
The Company organizes itself into
one
operating segment reporting to the Chief Executive Officer. For the
three
-month periods ended
March 31, 2016
and
2015
, product revenue from customers outside the United States totaled
26 percent
and
22 percent
, respectively with
9 percent
and
10 percent
, respectively, representing product revenue from customers in Germany. Long lived assets outside the United States totaled
$1.4 million
each at
March 31, 2016
and
December 31, 2015
.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new standard which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. The new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2017 and allows for adoption using a full retrospective method, or a modified retrospective method. Entities may elect to early adopt the standard for annual periods beginning after December 15, 2016. We are currently assessing the method of adoption and the expected impact the new standard has on our financial position and results of operations.
On February 25, 2016, the FASB issued ASU No. 2016-02-
Leases
(Topic 842), which provides new guidance on the accounting for leases. The provisions of this guidance are effective for annual periods beginning after December 31, 2018, and for interim periods therein. The Company has not yet assessed the impact of this new standard on its financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes
(“ASU 2015-17”), which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities, and any related valuation allowance, be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15, 2016 (and interim periods within those fiscal years) with early adoption permitted. ASU 2015-17 may be either applied prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company is currently evaluating the options for adoption and the impact on its balance sheet presentation.
3. License and Collaboration Agreements
Otsuka Pharmaceutical Co. Ltd
In December 2014, the Company entered into a collaboration agreement (the “Collaboration Agreement”) with Otsuka Pharmaceutical Co., Ltd. (“Otsuka”) pursuant to which Otsuka will commercialize and further develop
Iclusig in Japan, China, South Korea, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam (the “Territory”).
In consideration for the licenses and other rights contained in the Collaboration Agreement, Otsuka paid the Company a non-refundable upfront payment of
$77.5 million
, less a refundable withholding tax in Japan of
$15.8 million
that was received in 2015, and has agreed to pay the Company up to
$80 million
in future milestone payments upon obtaining further regulatory approvals in the Territory. Otsuka will pay royalties based on a percentage of net sales in each country until the later of (i) the expiry date of the composition patent in each country, (ii) the expiration of any orphan drug exclusivity period or other statutory designation that provides similar exclusivity, or (iii)
10
years after the date of first commercial sale in such country. Otsuka will also pay for the supply of Iclusig purchased from the Company at a price based on a percentage of net sales in each country.
The Collaboration Agreement continues until the later of (x) the expiration of all royalty obligations in the Territory, or (y) the last sale by Otsuka in the Territory, or the last to expire patent in the Territory which is currently expected to be 2029. Under certain conditions, the Collaboration Agreement may be terminated by either party, in which case the Company would receive all rights to the regulatory filings related to Iclusig at our request, and the licenses granted to Otsuka would be terminated.
The nonrefundable upfront cash payment has been recorded as deferred revenue on our balance sheet and is being recognized as revenue on a straight-line basis over the estimated term (currently estimated to extend through 2029), beginning at the point at which the Company began to provide all elements included in the Collaboration Agreement which occurred in April 2015.
Medinol Ltd.
The Company entered into an agreement with Medinol Ltd. (“Medinol”) in 2005 pursuant to which the Company granted to Medinol a non-exclusive, world-wide, royalty-bearing license, under its patents and technology, to develop, manufacture and sell stents and other medical devices to deliver the Company’s mTOR inhibitor, ridaforolimus, to prevent reblockage of injured vessels following stent-assisted angioplasty. The term of the license agreement extends to the later to occur of the expiration of the Company’s patents relating to the rights granted to Medinol under the license agreement or
fifteen
years after the first commercial sale of a product developed under the agreement.
The license agreement provides for the payment by Medinol to the Company of an upfront license fee, payments based on achievement of development, regulatory and commercial milestones and royalties based on commercial sale of products developed under the agreement. In January 2014, Medinol initiated
two
registration trials of its ridaforolimus-eluting stent system.
The Company is eligible to receive additional regulatory, clinical and commercial milestone payments of up to
$34.8 million
under the agreement if
two
products are successfully developed and commercialized.
4. Inventory
All of the Company’s inventories relate to the manufacturing of Iclusig. The following table sets forth the Company’s inventories as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Raw materials
|
$
|
482
|
|
|
$
|
813
|
|
Work-in-process
|
626
|
|
|
89
|
|
Finished goods
|
847
|
|
|
1,007
|
|
Total
|
1,955
|
|
|
1,909
|
|
Current portion
|
(936
|
)
|
|
(1,096
|
)
|
Non-current portion included in intangible and other assets, net
|
$
|
1,019
|
|
|
$
|
813
|
|
The Company has not capitalized inventory costs related to its other drug development programs. Non-current inventory consists of work-in-process inventory that was manufactured in order to provide adequate supply of Iclusig in the United States and Europe and to support continued clinical development.
The Company evaluates its inventory balances quarterly and if the Company identifies excess, obsolete or unsalable inventory, it writes down its inventory to its net realizable value in the period it is identified. These adjustments are recorded based upon various factors, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand for the foreseeable future and the expected shelf-life of the inventory components. The Company recorded such adjustments of
$47,000
and
$217,000
for the
three
-month periods ended
March 31, 2016
and
2015
, respectively, which are recorded as a component of cost of product revenue in the accompanying condensed consolidated statements of operations. Inventory that is not expected to be used within one year is included in other assets, net, on the accompanying condensed consolidated balance sheet.
5. Property and Equipment, Net
Property and equipment, net, was comprised of the following at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Leasehold improvements
|
$
|
23,682
|
|
|
$
|
23,609
|
|
Construction in progress
|
267,113
|
|
|
246,669
|
|
Equipment and furniture
|
28,761
|
|
|
26,388
|
|
|
319,556
|
|
|
296,666
|
|
Less accumulated depreciation and amortization
|
(43,794
|
)
|
|
(42,584
|
)
|
Property and Equipment, Net
|
$
|
275,762
|
|
|
$
|
254,082
|
|
As of
March 31, 2016
and
December 31, 2015
, the Company has recorded construction in progress of
$267.1 million
and
$246.7 million
, and a related facility lease obligation of
$248.6 million
and
$231.7 million
, respectively, related to a lease for a new facility under construction in Cambridge, Massachusetts. See Note 8 Long-term Debt.
Depreciation and amortization expense for the
three
-month periods ended
March 31, 2016
and
2015
was
$1.2 million
and
$0.9 million
, respectively.
6. Intangible and Other Assets, Net
Intangible and other assets, net, were comprised of the following at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Capitalized patent and license costs
|
$
|
5,975
|
|
|
$
|
5,975
|
|
Less accumulated amortization
|
(5,107
|
)
|
|
(5,076
|
)
|
|
868
|
|
|
899
|
|
Inventory, non-current
|
1,019
|
|
|
813
|
|
Other assets
|
4,353
|
|
|
4,393
|
|
Intangible and Other Assets, Net
|
$
|
6,240
|
|
|
$
|
6,105
|
|
7. Other Current Liabilities
Other current liabilities consisted of the following at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Amounts received in advance of revenue recognition
|
$
|
26,771
|
|
|
$
|
23,545
|
|
Other
|
796
|
|
|
779
|
|
Total
|
$
|
27,567
|
|
|
$
|
24,324
|
|
Amounts received in advance of revenue recognition consists of payments received from customers in France. Revenue will be recognized, net of amounts to be refunded to health authorities, upon completion of pricing and reimbursement negotiations.
8. Long-term Debt
Long-term debt consisted of the following at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Convertible notes, net
|
$
|
166,635
|
|
|
$
|
164,438
|
|
Royalty financing, net
|
46,885
|
|
|
46,921
|
|
Facility lease obligation
|
248,635
|
|
|
231,733
|
|
|
462,155
|
|
|
443,092
|
|
Less current portion
|
(16,636
|
)
|
|
(13,872
|
)
|
Long term portion
|
$
|
445,519
|
|
|
$
|
429,220
|
|
Convertible Notes due 2019
In June 2014, the Company issued
$200.0 million
aggregate principal amount of
3.625 percent
convertible senior notes due 2019 (the “convertible notes”). The Company received net proceeds of
$192.9 million
from the sale of the convertible notes, after deducting fees of
$6.0 million
and expenses of
$1.1 million
. At the same time, the Company used
$43.2 million
of the net proceeds from the sale of the convertible notes to pay the cost of convertible bond hedges, as described below, which cost was partially offset by
$27.6 million
in proceeds to the Company from the sale of warrants in the warrant transactions also described below.
The outstanding convertible note balances as of
March 31, 2016
and
December 31, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Liability component:
|
|
|
|
Principal
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Less: debt discount and unamortized debt issuance costs
|
(33,365
|
)
|
|
(35,562
|
)
|
Net carrying amount
|
$
|
166,635
|
|
|
$
|
164,438
|
|
Equity component
|
$
|
40,896
|
|
|
$
|
40,896
|
|
The Company determined the expected life of the debt was equal to the
five
-year term on the convertible notes. The effective interest rate on the liability component was
9.625 percent
for the period from the date of issuance through
March 31, 2016
. The following table sets forth total interest expense recognized related to the convertible notes for the
three
-month periods ended
March 31, 2016
and
March 31, 2015
:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Contractual interest expense
|
$
|
1,813
|
|
|
$
|
1,857
|
|
Amortization of debt discount
|
2,159
|
|
|
1,965
|
|
Amortization of debt issuance cost
|
37
|
|
|
34
|
|
Total interest expense
|
$
|
4,009
|
|
|
$
|
3,856
|
|
Royalty Financing
In July 2015, the Company entered into a Revenue Interest Assignment Agreement (the "RIAA") with PDL BioPharma, Inc. (“PDL”) under which the Company received an initial payment of
$50 million
in exchange for a percentage of global net revenues from sales of Iclusig until PDL receives a fixed internal rate of return on the funds it advances the Company. The Company will receive an additional
$50 million
one
year from the effective date of the agreement with the option to receive up to an additional
$100 million
in
one
or
two
tranches between the
six
-month and
twelve
-month anniversary dates of the agreement. The proceeds received from PDL are referred to as “advances”.
Under the agreement, the Company agreed to pay PDL a percentage of global Iclusig net product revenues subject to an annual maximum payment of
$20 million
per year through 2018. The rate is
2.5 percent
during the first year and increases to
5 percent
in the second year through the end of 2018 and
6.5 percent
from 2019 until PDL receives a
10 percent
internal rate of return. If the Company draws down in excess of
$150 million
, the
6.5 percent
rate would increase to
7.5 percent
until PDL receives
10 percent
internal rate of return. Through
March 31, 2016
, the Company has paid a total of
$2.3 million
to PDL under this agreement. Payments are deemed to be applied against advances. Interest expense related to the financing agreement was
$0.9 million
for the
three
-months ended
March 31, 2016
.
Beginning in 2019, if PDL does not receive specified minimum payments each year from sales of Iclusig, then it will also have the right to receive a certain percentage of net revenues from sales of brigatinib, subject to its approval by regulatory authorities. If PDL has not received total cumulative payments under this agreement that are at least equal to the amounts PDL has advanced to the Company by the fifth anniversary of each funding date, the Company is required to pay PDL an amount equal to the shortfall.
PDL retains the option to require the Company to repurchase the then outstanding net advances, together with additional payments representing return on investment as described below (the “put” option), in the event the Company experiences a change of control, undergoes certain bankruptcy events, transfers any of its interests in Iclusig (other than pursuant to a license agreement, development, commercialization, co-promotion, collaboration, partnering or similar agreement), transfers all or substantially all of its assets, or breaches certain of the covenants, representations or warranties made under the agreement. Similarly, the Company has the option to terminate the agreement at any time by payment of the then outstanding net advances, together with additional payments representing return on investment as described below (the “call” option). Both the put and call options can be exercised at a price which is equal to the greater of (a) the then outstanding net advances and an amount that would generate an internal rate of return to PDL of
10 percent
after taking into account the amount and timing of all payments made to PDL by the Company or (b) a multiple of the then outstanding net advances of
1.15
if exercised on or prior to the first anniversary of the closing date,
1.20
if exercised after the first anniversary but on or prior to the second anniversary of the closing date or
1.30
if exercised after the second anniversary of the closing date.
In connection with the agreement, the Company also entered into a security agreement with PDL on the same date as the royalty financing agreement. Under the security agreement, the Company granted PDL a security interest in certain assets relating to Iclusig, including all of the Company’s revenues from sales of Iclusig covered by the royalty financing agreement, a certain segregated deposit account established under the royalty financing agreement, and certain intellectual property, license agreements, and regulatory approvals related to Iclusig. The collateral set forth in the security agreement secures the Company’s obligations under the royalty financing agreement, including its obligation to pay all amounts due thereunder.
For accounting purposes, the agreement has been classified as a debt financing as the Company will have significant continuing involvement in the sale of Iclusig and other products which might be covered by the agreement, the parties have the right to cancel the agreement as described above, PDL’s rate of return is implicitly limited by the terms of the transaction, volatility in the sale of Iclusig and other products would have no effect on PDL’s expected ultimate return, and PDL has certain rights in the event that product sales and related payments under this agreement are insufficient to pay down the Company’s obligations.
In connection with the transaction, the Company recorded the initial net proceeds as long-term debt. The Company imputes interest expense associated with this borrowing using the effective interest rate method and will record a
corresponding accrued interest liability. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement, including the required 10 percent internal rate of return to PDL. Determining the effective interest rate requires judgment and is based on significant assumptions related to estimates of the amounts and timing of future revenue streams. Determination of these assumptions is highly subjective and different assumptions could lead to significantly different outcomes.
The Company determined that the put option is an embedded derivative. This item is being accounted for as a derivative and the estimated fair value of the put option, which was immaterial as of the date of the agreement and as of
March 31, 2016
is carried as part of the carrying value of the related liability.
Facility Lease Obligation
As of
March 31, 2016
and
December 31, 2015
, the Company has recorded a facility lease obligation related to its lease for a new facility under construction in Cambridge, Massachusetts. See notes 5 and 9 for information regarding the lease and related asset under construction. During the construction period the Company is capitalizing the construction costs as a component of construction in progress with a corresponding credit to facility lease obligation to the extent the cost was paid by the Company or reimbursed by the landlord.
The Company expects to complete construction and occupy the facility in the third quarter of 2016. Under terms of the lease, the Company commenced making lease payments in March 2015. During the construction period, a portion of the lease payment is allocated to land lease expense with the remainder accounted for as a reduction of the obligation. See Note 9 for information regarding payments and other terms.
9. Leases, Licensed Technology and Other Commitments
Facility Leases
The Company conducts the majority of its operations in a
100,000
square foot office and laboratory facility under a non-cancelable operating lease that extends to July 2019 with
two
consecutive
five
-year renewal options. The Company maintains an outstanding letter of credit of
$1.4 million
in accordance with the terms of the amended lease. In May 2012, the Company entered into a
three
-year operating lease agreement for an additional
26,000
square feet of office space which was extended to August 2016. Future non-cancelable minimum annual rental payments through July 2019 under these leases are
$5.2 million
remaining in
2016
,
$6.0 million
in
2017
,
$6.1 million
in
2018
and
$3.6 million
in
2019
.
Binney Street, Cambridge, Massachusetts
In January 2013, the Company entered into a lease agreement for approximately
244,000
square feet of laboratory and office space in two adjacent, connected buildings which are under construction in Cambridge, Massachusetts. Under the terms of the original lease, the Company leased all of the rentable space in
one
of the
two
buildings and a portion of the available space in the second building. In September 2013, the Company entered into a lease amendment to lease all of the remaining space, approximately
142,000
square feet, in the second building, for an aggregate of
386,000
square feet in both buildings. The terms of the lease amendment were consistent with the terms of the original lease. Construction of the core and shell of the building was completed in March
2015
at which time construction of tenant improvements in the building commenced. Construction of the tenant improvements is expected to be completed in the second half of 2016.
In connection with this lease, the landlord is providing a tenant improvement allowance for the costs associated with the design, engineering, and construction of tenant improvements for the leased facility. The tenant improvements will be in accordance with the Company’s plans and include fit-out of the buildings to construct appropriate laboratory and office space, subject to approval by the landlord. To the extent the stipulated tenant allowance provided by the landlord is exceeded, the Company is obligated to fund all costs incurred in excess of the tenant allowance. The scope of the planned tenant improvements do not qualify as “normal tenant improvements” under the lease accounting guidance. Accordingly, for accounting purposes, the Company is the deemed owner of the buildings during the construction period.
As construction progresses, the Company records the project construction costs incurred as an asset. To the extent that the cost is incurred by the landlord or incurred by the Company and reimbursed by the landlord, the Company records a corresponding increase to facility lease obligation included in long-term debt on the consolidated balance sheet. Upon completion of the buildings, the Company will determine if the asset and corresponding financing obligation should continue to be carried on its consolidated balance sheet under the relevant accounting guidance. Based on the current terms of the lease, the Company expects to continue to be the deemed owner of the buildings upon completion of the construction period. As of
March 31, 2016
, the Company has recorded construction in progress of
$267.1 million
and a facility lease obligation of
$248.6 million
.
The initial term of the lease is for
15
years from substantial completion of the core and shell of the buildings, which occurred in March 2015, with options to renew for
three
terms of
five
years each at market-based rates. The base rent is subject to increases over the term of the lease. Based on the original and amended leased space, the future non-cancelable minimum annual lease payments under the lease are
$6.5 million
in
2016
,
$25.5 million
in
2017
,
$31.0 million
in
2018
,
$31.5 million
in
2019
,
$32.1 million
in
2020
,
$32.7 million
in
2021
and
$292.6 million
thereafter, plus the Company’s share of the facility operating expenses and other costs that are reimbursable to the landlord under the lease.
The Company maintains a letter of credit of
$9.2 million
as security for the lease, which is supported by restricted cash.
In August 2015, the Company entered into a sublease agreement for approximately
160,000
square feet of the
total leased space in the Binney Street facility. The sublease has an initial term of
10 years
from the rent
commencement date, which is expected to be in the third quarter of 2016 with an option to extend for the
remainder of the initial term of the Company’s underlying lease. The sublease rent is subject to increases over the
term of the lease. Based on the agreement, during the initial term the non-cancelable minimum annual sublease
payments by calendar year beginning upon the rent commencement date of the sublease are approximately
$5.3 million
in
2016
,
$10.7 million
in
2017
,
$10.9 million
in
2018
,
$11.1 million
in
2019
and
$11.3 million
in
2020
and
$65.5 million
thereafter, plus the subtenant’s share of the facility operating expenses.
Lausanne, Switzerland
In January 2013, the Company entered into a lease agreement for approximately
22,000
square feet of office space in a building, which the Company occupied in
2014
. The term of the lease is for
ten
years, with options for extension of the term and an early termination at the Company’s option after
five
years. Future non-cancelable minimum annual lease payments under their lease are expected to be approximately
$0.5 million
in
2016
,
$1.1 million
in
2017
,
2018
,
2019
and
2020
, and
$3.3 million
in total thereafter.
Total rent expense for the leases described above as well as other Company leases for the
three
-month periods ended
March 31,
2016
and
2015
was
$2.3 million
and
$1.9 million
, respectively. Contingent rent for the
three
-month periods ended
March 31,
2016
and
2015
was
$194,000
and
$199,000
, respectively. Total future non-cancelable minimum annual rental payments for the leases described above as well as other Company leases are
$12.9 million
in
2016
,
$32.7 million
in
2017
,
$38.2 million
in
2018
,
$36.2 million
in
2019
,
$33.2 million
in
2020
and
$328.6 million
thereafter.
Other Commitments
The Company has entered into employment agreements with each of the officers of the Company. The agreements for these officers have remaining terms as of
March 31, 2016
extending through the end of 2016 and through March 2019, providing for aggregate base salaries of
$6.9 million
for the remainder of
2016
and
$5.0 million
for
2017
to
2019
.
10. Stockholders’ Deficit
Changes in Stockholders' Equity
The changes in stockholders' equity for the
three
-month period ended
March 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Accumulated
Other
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
Stockholders’
|
In thousands, except share data
|
Shares
|
|
Amount
|
|
Capital
|
|
Income (Loss)
|
|
Deficit
|
|
Equity
|
Balance, January 1, 2016
|
189,662,148
|
|
|
$
|
190
|
|
|
$
|
1,338,585
|
|
|
$
|
3,835
|
|
|
$
|
(1,445,751
|
)
|
|
$
|
(103,141
|
)
|
Issuance of shares pursuant to ARIAD stock plans
|
1,397,992
|
|
|
1
|
|
|
776
|
|
|
—
|
|
|
—
|
|
|
777
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
6,719
|
|
|
—
|
|
|
—
|
|
|
6,719
|
|
Payments of tax withholding obligations related to stock compensation
|
—
|
|
|
—
|
|
|
(617
|
)
|
|
—
|
|
|
—
|
|
|
(617
|
)
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,963
|
)
|
|
—
|
|
|
(3,963
|
)
|
Net Loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(53,787
|
)
|
|
(53,787
|
)
|
Balance, March 31, 2016
|
191,060,140
|
|
|
$
|
191
|
|
|
$
|
1,345,463
|
|
|
$
|
(128
|
)
|
|
$
|
(1,499,538
|
)
|
|
$
|
(154,012
|
)
|
11. Fair Value of Financial Instruments
At
March 31, 2016
and
December 31, 2015
, the carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The fair value of the convertible notes, which differs from their carrying value, is influenced by interest rates and stock price and stock price volatility and is determined by prices for the convertible notes observed in market trading. The market for trading of the convertible notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the convertible notes, face value of
$200.0 million
, was
$192.0 million
at
March 31, 2016
and
$198.0 million
at
December 31, 2015
, respectively.
12. Stock Compensation
ARIAD Stock Option and Stock Plans
The Company’s 2001, 2006 and 2014 stock option and stock plans (the “Plans”), which have been approved by the Company's stockholders, provide for the awarding of non-qualified and incentive stock options, stock grants, restricted stock units, performance share units and other equity-based awards to officers, directors, employees and consultants of the Company. Stock options become exercisable as specified in the related option certificate, typically over a
three
or
four
-year period, and expire
ten years
from the date of grant. Stock grants, restricted stock units and performance share units provide the recipient with ownership of common stock subject to terms of vesting, any rights the Company may have to repurchase the shares granted or other restrictions. The 2006 Plan has
no
shares remaining available for grant although existing stock options granted remain outstanding. The 2001 Plan expired in March 2016, there are
no
outstanding shares. As of
March 31, 2016
, there were
6,327,928
shares available for awards under the 2014 Plan.
Inducement Awards
During the three-month period ending March 31, 2016, the Company issued the following equity awards to senior executives of the Company outside of the Plans as inducements material to their entering into employment with the Company in accordance with NASDAQ rules (the "Inducement Awards"): (i) for the Company's new CEO,
200,000
restricted stock units and
1,500,000
stock options, which vest over
18
months and
four
years, respectively; and (ii) for the Company's new CFO,
550,000
stock options vesting over
four
years and
150,000
performance shares that will be earned based on the relative total shareholder return of the Company’s stock price compared to component companies in the NASDAQ Biotechnology Index over a
3
year period ending December 31, 2018. There were
no
Inducement Awards in the three-month period ending March 31, 2015.
Employee Stock Purchase Plan
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan (“ESPP”) and reserved
500,000
shares of common stock for issuance under this plan. The ESPP was amended in June 2008 to reserve an additional
500,000
shares of common stock for issuance and the plan was further amended in 2009 and in June 2015 to reserve an
additional
750,000
shares of common stock for issuance pursuant to each of those amendments. Under this plan, substantially all of the Company’s employees may, through payroll withholdings, purchase shares of the Company’s common stock at a price of
85 percent
of the lesser of the fair market value at the beginning or end of each
three
-month withholding period. For the
three
-month periods ended
March 31,
2016
and
2015
,
78,903
and
72,379
shares of common stock were issued under the plan, respectively. Compensation cost is equal to the fair value of the discount on the date of grant and is recognized as compensation in the period of purchase.
Stock-Based Compensation
The Company’s statements of operations included total compensation cost from awards under the Plans, the Inducement Awards, and purchases under the ESPP for the
three
-month periods ended
March 31, 2016
and
2015
, as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Compensation cost from:
|
|
|
|
Stock options
|
$
|
3,282
|
|
|
$
|
4,241
|
|
Stock and stock units
|
3,271
|
|
|
4,067
|
|
Purchases of common stock at a discount
|
166
|
|
|
126
|
|
|
$
|
6,719
|
|
|
$
|
8,434
|
|
Compensation cost included in:
|
|
|
|
Research and development expense
|
$
|
3,765
|
|
|
$
|
3,816
|
|
Selling, general and administrative expense
|
2,954
|
|
|
4,618
|
|
|
$
|
6,719
|
|
|
$
|
8,434
|
|
Stock Options
Stock options are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. Stock options generally vest ratably over three or four years and have contractual terms of
ten years
. Stock options are valued using the Black-Scholes option valuation model and compensation cost is recognized based on such fair value over the period of vesting on a straight-line basis.
Stock option activity under the Plans and Inducement Awards for the
three
-month period ended
March 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
Per Share
|
Options outstanding, January 1, 2016
|
10,232,969
|
|
|
$
|
10.00
|
|
Granted
|
3,464,825
|
|
|
$
|
5.86
|
|
Forfeited
|
(201,147
|
)
|
|
$
|
10.50
|
|
Exercised
|
(23,600
|
)
|
|
$
|
3.84
|
|
Options outstanding, March 31, 2016
|
13,473,047
|
|
|
$
|
8.94
|
|
Stock and Stock Unit Grants
Stock and stock unit grants carry restrictions as to resale for periods of time or vesting provisions over time as specified in the grant. Stock and stock unit grants are valued at the closing market price of the Company’s common stock on the date of grant and compensation expense is recognized over the requisite service period, vesting period or period during which restrictions remain on the common stock or stock units granted.
Stock and stock unit activity under the Plans and Inducement Awards for the
three
-month period ended
March 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding, January 1, 2016
|
4,493,054
|
|
|
$
|
8.64
|
|
Granted / awarded
|
2,660,762
|
|
|
$
|
6.00
|
|
Forfeited
|
(353,964
|
)
|
|
$
|
8.96
|
|
Vested or restrictions lapsed
|
(1,329,120
|
)
|
|
$
|
7.99
|
|
Outstanding, March 31, 2016
|
5,470,732
|
|
|
$
|
7.50
|
|
The total fair value of stock and stock unit awards that vested as of
March 31,
2016
and
2015
was
$8.5 million
and
$5.7 million
, respectively. The total unrecognized compensation expense for restricted shares or units that have been granted or are probable to be awarded was
$19.1 million
at
March 31, 2016
and will be recognized over
2.1
years on a weighted average basis.
The Company recognizes compensation expense for performance share units when the achievement of the performance metric is determined to be probable of occurrence. The total number of units earned, and related compensation cost, may be up to
60 percent
higher depending on the level or timing of achievement of the metric as defined in the specific award agreement.
13. Net Loss Per Share
Basic net loss per share amounts have been computed based on the weighted-average number of common shares outstanding. Diluted net loss per share amounts have been computed based on the weighted-average number of common shares outstanding plus the dilutive effect, if any, of potential common shares. The computation of potential common shares has been performed using the treasury stock method. Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same.
The net loss and the number of shares used to compute basic and diluted earnings per share for the
three
-month periods ended
March 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
In thousands, except per share amounts
|
2016
|
|
2015
|
Net loss
|
$
|
(53,787
|
)
|
|
$
|
(52,676
|
)
|
Weighted average shares outstanding – basic and diluted
|
190,304
|
|
|
187,837
|
|
Net loss per share – basic and diluted
|
$
|
(0.28
|
)
|
|
$
|
(0.28
|
)
|
14. Accumulated Other Comprehensive (Loss) Income
The changes in accumulated other comprehensive (loss) income for the
three
-month period ended
March 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Unrealized
Gains
on
Marketable
Securities, net of tax
|
|
Cumulative
Translation
Adjustment
|
|
Defined
Benefit
Pension
Obligation
|
|
Total
|
Balance, January 1, 2016
|
6,821
|
|
|
567
|
|
|
(3,553
|
)
|
|
3,835
|
|
Other comprehensive (loss) income
|
(3,986
|
)
|
|
(32
|
)
|
|
55
|
|
|
(3,963
|
)
|
Balance, March 31, 2016
|
$
|
2,835
|
|
|
$
|
535
|
|
|
$
|
(3,498
|
)
|
|
$
|
(128
|
)
|
15. Restructuring Actions
In the first quarter of fiscal 2016, the Company incurred expenses of
$2.9 million
associated with employee workforce reductions of approximately
90
positions implemented in March 2016. The restructuring charges will be paid by the end of
2016
.
16. Defined Benefit Pension Obligation
The Company maintains a defined benefit pension plan for employees in its Switzerland subsidiary. The plan provides benefits to employees upon retirement, death or disability.
The net periodic benefit cost for the three-month periods ended
March 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
2016
|
|
2015
|
Service cost
|
$
|
454
|
|
|
$
|
448
|
|
Interest cost
|
29
|
|
|
50
|
|
Expected return on plan assets
|
(23
|
)
|
|
(37
|
)
|
Amortization of prior service cost
|
55
|
|
|
77
|
|
Net periodic benefit cost
|
$
|
515
|
|
|
$
|
538
|
|
The Company expects to contribute
$1.6 million
in total to the plan in 2016.
17. Litigation
There were no material legal proceedings that were instituted or terminated during the quarter ended
March 31,
2016
, and there have been no material developments in the pending legal proceedings disclosed in Note 16 to the audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
.
From time to time, the Company may be subject to various claims and legal proceedings. If the potential loss from any claim, asserted or unasserted, or legal proceedings is considered probable and the amount is reasonably estimated, the Company will accrue a liability for the estimated loss.
18. Subsequent Events
Entry into European Transaction
On May 9, 2016, ARIAD and its wholly-owned subsidiary ARIAD Pharmaceuticals (Cayman) L.P. (the “Seller”) entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with Incyte Corporation (“Incyte”) (as guarantor) and its wholly-owned subsidiary Incyte Europe S.a.r.l. (“Incyte Europe”), pursuant to which Incyte Europe has agreed to acquire from the Seller all of the outstanding shares of ARIAD Pharmaceuticals (Luxembourg) S.a.r.l., the parent company of ARIAD’s European subsidiaries responsible for the commercialization of Iclusig® (ponatinib) in the European Union (“EU”) and
22
other countries, including Switzerland, Norway, Turkey, Israel and Russia (the “Territory”), for an upfront payment of
$140 million
(the “Upfront Payment”).
In connection with the transactions contemplated by the Share Purchase Agreement, the parties have also agreed on an Amended and Restated Buy-in License Agreement to be entered into between ARIAD, Incyte (as guarantor) and ARIAD Pharmaceuticals (Europe) S.a.r.l., one of the entities that will be owned by Incyte upon the closing of the transactions contemplated by the Share Purchase Agreement (the “License Agreement”). Under the terms of the License Agreement, Incyte will be granted an exclusive license to develop and commercialize Iclusig in the Territory (the “License”). ARIAD will be entitled to receive tiered royalties from Incyte of between
32 percent
and
50 percent
of net sales of Iclusig in the Territory (the “Royalty Payments”). The Royalty Payments will be subject to adjustment for certain events, including events related to the expiration of statutory or regulatory exclusivity periods for the commercialization of Iclusig in the Territory. In addition, ARIAD will be eligible to receive up to
$135 million
in potential development and regulatory milestones for Iclusig in new oncology indications in the Territory, together with additional milestones for non-oncology indications, if approved, in the Territory. Incyte has agreed to contribute up to
$7.0 million
in each of 2016 and 2017 to fund ARIAD’s OPTIC and OPTIC-2L clinical trials. The terms of the License Agreement also include an option for an acquirer of ARIAD to re-purchase the licensed rights from Incyte, subject to certain conditions.
Unless terminated earlier in accordance with its provisions, the term of the License Agreement, including Incyte's obligation to make the full Royalty Payments, will continue in effect on a country-by-country basis until the latest to occur of (1) the expiration date of the composition patent in the relevant country (which, for the countries in Europe covered by our patents, is generally July 2028, subject to a potential
six
-month extension for pediatric exclusivity), (2) the expiration of any regulatory marketing exclusivity period or other statutory designation that provides similar exclusivity for the commercialization of Iclusig in such country and (3) the seventh anniversary of the first commercial sale of Iclusig in such country; and thereafter, in the absence of generic competition, for a specified period of time in which Incyte will be obligated to pay royalties at a reduced rate.
The closing under the Share Purchase Agreement and effectiveness of the License Agreement is currently expected to occur on or about June 1, 2016, subject to satisfaction of customary closing conditions.
Amendment to Royalty Financing
On May 9, 2016, in connection with the transactions with Incyte, ARIAD and PDL agreed to amend the RIAA to, among other things, include in the Iclusig net sales calculation under the RIAA net sales of Iclusig made by Incyte in the Territory under the License Agreement. In addition, ARIAD’s option to receive additional funding was restructured so that ARIAD may require PDL to fund up to an additional
$40 million
(instead of the original
$100 million
) in July 2017 (instead of between January and July 2016). In connection with the amendment to the RIAA, ARIAD and PDL also agreed to release ARIAD’s European patents and certain other European assets from the collateral. These agreements with PDL are subject to and effective upon the closing of the Incyte transaction.